A Smart Financial Guide for Solopreneurs: Key Retirement and Savings Strategies

If you’re a solopreneur—running your business without employees—your financial planning is entirely in your hands. Without employer-provided benefits, it’s crucial to take advantage of available tools to ensure a secure financial future. Here’s a breakdown of key strategies to help you plan for retirement, healthcare, and long-term savings.

Start with the Basics

Roth IRA

One of the most straightforward and powerful retirement savings options is the Roth IRA. It offers tax-free growth and withdrawals in retirement, making it an excellent choice for long-term savings. If you’re married, consider contributing to a Roth IRA for both yourself and your spouse.

If your income exceeds the Roth IRA contribution limits, you can use a Backdoor Roth IRA. This strategy involves contributing to a traditional IRA and converting those funds into a Roth IRA, allowing you to bypass income limits while still benefiting from tax-free growth.

HSA (Health Savings Account)

Healthcare costs can quickly add up, especially for solopreneurs. Choosing a high-deductible health plan (HDHP) that allows you to contribute to a Health Savings Account (HSA) is a smart way to save for medical expenses. HSAs offer a triple tax benefit: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Plus, your HSA funds roll over year to year, making it a great tool for both short-term and long-term healthcare savings. HSAs can even be used as an extra retirement savings vehicle for healthcare costs in your later years.

Retirement Accounts

SEP IRA

The SEP IRA is often one of the first retirement accounts solopreneurs consider because it’s easy to set up and allows you to contribute up to 25% of your self-employment earnings. One major benefit of the SEP IRA is that you can set it up after the calendar year has closed, giving you flexibility in tax planning if you’re looking to make contributions for the prior year.

However, for S-Corporations, the SEP IRA falls short. SEP contributions are based on your W-2 wages, which are often kept low to minimize payroll taxes. This limitation can significantly reduce the amount you’re able to contribute, making the SEP IRA less effective for maximizing retirement savings.

Solo 401(k)

A Solo 401(k), on the other hand, offers more flexibility and higher contribution limits. You can contribute both as the employee and the employer, meaning you can sock away more money, even if you keep your salary low.

Solo 401(k)s also allow for Roth contributions, meaning you can make after-tax contributions and enjoy tax-free withdrawals in retirement. Additionally, Solo 401(k) plans offer the option to take loans, which SEP IRAs do not.

Another key advantage of Solo 401(k)s is greater legal protection. These plans generally provide more protection from lawsuits and creditors than SEP IRAs, giving you extra peace of mind in case of financial or legal troubles. If you’re serious about maximizing retirement savings while safeguarding your assets, the Solo 401(k) is often the better choice.

Cash Balance Plan for High Earners

For extremely high earners looking to maximize their retirement savings beyond the limits of SEP IRAs and Solo 401(k)s, a Cash Balance Plan can be an excellent option. This is a type of defined benefit plan that allows for much larger contribution limits compared to a 401(k) or IRA. Contributions to a Cash Balance Plan are based on age and income, and the older and higher earning you are, the more you can contribute.

Cash Balance Plans are especially beneficial for solopreneurs with substantial income who want to aggressively reduce taxable income and save large sums for retirement. However, they are more complex to administer and require the help of an actuary, making them better suited for those who need to defer significant amounts of income.

Planning Strategies

SEP IRA Conversion to Solo 401(k)

While the Solo 401(k) is often a better choice, the SEP IRA has a unique advantage: you can establish it and make contributions after the year ends. This flexibility is great if you find yourself needing a last-minute tax-saving strategy for the prior year.

One smart move is to set up a SEP IRA for the previous year, then roll those funds into a Solo 401(k) for the current year. This allows you to benefit from the SEP IRA’s flexibility while taking full advantage of the Solo 401(k)’s higher contribution limits and Roth options. It’s a great way to maximize your retirement savings when you’re in a pinch after year-end.

Rolling Over Old IRAs into a Solo 401(k)

If you have old IRAs from previous jobs or investments, rolling them over into your Solo 401(k) could be a game-changer. Why? It eliminates the pro-rata rule when doing a Backdoor Roth IRA. The pro-rata rule can complicate the tax benefits of a Backdoor Roth if you have existing traditional IRA funds. By rolling those old IRA balances into your Solo 401(k), you simplify your accounts and free yourself up to execute a Backdoor Roth without triggering additional taxes due to the pro-rata calculation.

Make Sure Your HSA Is Being Invested

If you’re contributing to an HSA, make sure the funds aren’t just sitting idle in a low-interest account. Investing your HSA can maximize its potential for long-term growth, similar to a retirement account. Since you can’t predict when medical expenses will occur, investing a portion of your HSA in low-cost index funds or other options can help you build a robust balance to cover future healthcare costs. Just like with retirement accounts, compounding growth over time is a key advantage to making sure your HSA is working for you.

Allocate Retirement Savings to Business Accounts for Tax Benefits

If your spouse is working, it can often be more beneficial to allocate retirement savings in your business retirement accounts—such as a Solo 401(k)—due to the self-employment tax. Retirement contributions through business accounts can lower your taxable income, thus reducing self-employment taxes while still allowing you to save for the future. This strategy can give you a tax-efficient way to build retirement savings for both you and your spouse.

Conclusion

As a solopreneur, you have the opportunity to tailor your financial plan to fit your needs. By starting with the basics—like Roth IRAs and HSAs—then leveraging more advanced strategies such as Solo 401(k)s, SEP IRA conversions, IRA rollovers, and even Cash Balance Plans for high earners, you can create a comprehensive retirement and healthcare plan that works for you and your spouse. Stay proactive, and take full control of your financial future today!